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Ethical considerations have long had a role in financial and economic decision-making, from the abolition of slavery and the enlightened practices of Victorian industrialists like William Cadbury and Robert Owen, to global economic sanctions imposed on apartheid South Africa in the latter decades of the last century.

Several developments in recent years have meant that environmental, social and governance (ESG) factors as considerations in investment analysis are now widely assumed by the investment industry to be all but inevitable.

Judging by the growth in signatories to the United Nations Principles of Responsible Investment, the investment management industry is largely sold on the benefits of integrating ESG issues into investment processes.

In 2014 the Law Commission for England and Wales said there was no bar on pension trustees and others from taking account of ESG factors when making investment decisions.

Its statement followed the publication of a United Nations-commissioned report by the international law firm Freshfields Bruckhaus Deringer which stated that not only was it desirable for investment companies to integrate ESG issues into investment analysis, arguably it was part of their fiduciary duty to do so.

According to US SIF: The Forum for Sustainable and Responsible Investment, there was a reported 1,003 pooled vehicles, including mutual funds and alternative investments, with more than $2.6bn under management that incorporated ESG and socially responsible investing (SRI) criteria into their decision-making process by the end of last year.

Its Report on US Sustainable, Responsible and Impact Investing Trends in 2016 also noted that $2.7bn of state and local pension funds applied some component of ESG/SRI to their investment process.

Judging by the growth in signatories to the United Nations Principles of Responsible Investment (UN PRI), the investment management industry is largely sold on the benefits of integrating ESG issues into investment processes.

Their clients - the owners of the assets for whom they invest - appear less persuaded.

Placing returns before ESG issues

Is this because the managers’ product offerings fail to distinguish between those who wish to invest for client gain and those who invest for general good? Or is a more cynical interpretation of managers’ apparent conversion warranted?

A point worth making at the outset is that not all investment managers agree on the merits of ESG: some are passionate advocates while others believe their first responsibility is to maximise their clients’ returns.

US economist Milton Friedman believed the sole responsibility of business was to "increase its profits so long as it stays within the rules of the game"; that is to "engage in open and free competition without deception or fraud".

Investors who subscribe to this view may be interested in ESG issues because they’re incorrectly priced and, by correctly weighing ESG implications, they can generate higher returns for a comparable risk.